We all had high expectations for 2013. A favourable lending environment, deep piles of private equity “dry powder” sitting on the side lines ready to invest and US tax issues seemingly put to rest set up an environment ripe for M&A activity. However, the first half of 2013 was eerily quiet with few completed transactions. Few deals flowed into early 2013 as business sellers raced to complete transactions at the end of 2012 in advance of US tax increases for the coming year. The second half of the year picked up steam and it looked as if we’d be able to make up some ground, however the momentum was not sustainable. With no urgent incentives to finish transactions by year’s end, deals didn’t get done and failed to live up to expectations.
Interestingly, the same factors that created a sluggish 2011, such as uncertainty in “fiscal stability”, crept back in 2013, causing concern for business owners and investors alike. M&A activity hit an eight-year low, dropping below dot com levels. Investors were reluctant to invest in the unfamiliar and so turned to less risky add-on investments to current portfolio holdings. Smaller size deals became highly sought after and values were driven higher.
What’s in store for 2014? We again hear that the coming year is ripe for increases in M&A activity and we are cautiously optimistic. Private equity investors are still flush with cash and looking to invest and the lending environment is favourable. Our dealmakers report a backlog of deals that will close in the first quarter of 2014, kick-starting the year.
According to a recent PwC CEO survey, at least 75% of respondents expected corporate growth from either organic or inorganic means and nearly half of those respondents expected to grow by acquisition within the next 12 months. The middle market will still be that highly sought after place where both strategic and financial buyers will be committing capital so as to keep their risk levels in check.
If you are the owner of a middle market business and will be considering a sale within the next few years, now is a great time to start planning. With the baby boom generation now transitioning from business ownership to retirement, there will be a window of opportunity to exit optimally. You wouldn’t want that window to slip away.
– Doug Nix is vice-chairman of Corporate Finance Associates. For more information, visit www.cfaw.ca